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Ifo Policy Issue: Minimum Wage

Hardly any recent economic-policy topic has aroused so much controversy as the introduction of a general minimum wage in Germany. The insistence that full-time employment must be rewarded by a socially acceptable income appeals at first glance to a general sense of justice, but it also contains considerable risks that run contrary to this sense of justice.

Since wages determine labour costs, job losses are likely in today’s low wage sector. These losses can arise either direct (through rationalisation) or indirect (through lowered price competitiveness of domestic producers). Correspondingly, also the goal of increasing aggregate demand is not achieved, as a rule, by the introduction of minimum wages. The social-policy goal of assuring a minimum income can thus be better achieved by public social transfers than by minimum wages. Here the Ifo Institute has proposed the model of Activating Social Welfare.